The Latte Index: Using The Impartial Bean To Value Currencies

Like any other market, there are many opinions on what a currency ought to be worth relative to others.

With certain currencies, that spectrum of opinions is fairly narrow. As an example, for the world’s most traded currency – the U.S. dollar – the majority of opinions currently fall in a range from the dollar being 2% to 11% overvalued, according to organizations such as the Council of Foreign Relations, the Bank of International Settlements, the OECD, and the IMF.

For other currencies, the spectrum is much wider. The Swiss franc, which some have called the world’s most perplexing currency, has estimates from those same groups ranging from about 13% undervalued to 21% overvalued.

As VisualCapitalist's Jeff Desjardins notes, such a variance in estimates makes it hard to come up with any conclusive consensus – so in today’s chart, we refer to a more caffeinated and fun measure that also approximates the relative value of currencies.

THE IMPARTIAL BEAN

The “Latte Index”, developed by The Wall Street Journal, uses purchasing-power parity (PPP) – comparing the cost of the same good in different countries – to estimate which currencies are overvalued and undervalued.

In this case, the WSJ tracked down the price of a tall Starbucks latte in dozens of cities around the world. These prices are then converted to U.S. dollars and compared to the benchmark price, which is a tall Starbucks latte in New York City (US$3.45).

Courtesy of: Visual Capitalist

The Latte Index is mostly for fun, but it’s also broadly in line with predictions made by the experts.

For example, the price of a latte in Toronto, Canada works out to US$2.94, which is about 14.8% under the benchmark NYC price. This suggests that relative to the USD, the Canadian dollar is undervalued. Interestingly, estimates from the aforementioned sources (BIS, OECD, CFR, IMF) have the Canadian dollar at being up to 10% undervalued – which puts the Latte Index not too far off.

Given the wild range of estimates that exist for currency values, using the relative cost of a cup of joe might be as good of a proxy as any.

Comments

shitshitshit Ghordius Thu, 12/07/2017 - 03:14 Permalink

having lived in this brussel shithole for 4 years I beg to disagree: brussel is a five stars bona fide shithole.Drinking your toxic hipster thing is never the less expensive because there is a cast of eurocrats that know nothing else than sitting on their asses all day. And they need training for that, as well as to order gentlemen latte.Their main driver is immobility, and they get truckloads of free dragi money for that. 

In reply to by Ghordius

gunzeon Ghordius Thu, 12/07/2017 - 03:20 Permalink

bud, Brussels per se is not rich; there's just a lot of EU and NATO apparatchics getting inflated tax-free salaries and living allowances that cause prices in Brussels to be jacked up; normal taxpaying folk here live hand to mouth and are taxed like coal pit ponies ... unless they too are feeding off the EU party which is the only game in town.

In reply to by Ghordius

Ghordius any_mouse Thu, 12/07/2017 - 05:14 Permalink

typical for ZH comment standards

I wrote "compared with Berlin"

and I get... a "ZioNATO"

28 members. one of them just recognized Jerusalem as capital of Israel

what do the other 27 say? that's the very moment many commenters here put their fingers in their ears and start singing "LaLaLaLa..." as loud as they can

In reply to by any_mouse

Raul44 Ghordius Thu, 12/07/2017 - 09:00 Permalink

Yes, this is why I am glad to see you comment from time to time, at least something of value to learn even if I disagree occasionally. Btw I agree its a rent prices that play a big role but must be something else also because here for example London is a lot cheaper than Zurich but have higher rent prices. Maybe minimum salaries play just as much role?

In reply to by Ghordius

hooligan2009 Cast Iron Skillet Thu, 12/07/2017 - 03:21 Permalink

jet powered drone delivery across the eurozone - after all, the price and quality disparaities across the "free trade" area are so fucked up in the blatantly failed EU experiment, it is the duty of all countries to arbitrage the corporate/income tax codes, tariff and non-tariff barriers of each country within europe.small wonder that AMZN/Uber etc can pentrate the assholes of europe so easily - the failed experiment gives away free lube!

In reply to by Cast Iron Skillet

MusicIsYou Thu, 12/07/2017 - 03:21 Permalink

It really shows how stupid people are how they exchange their hard-earned production for some invisible electron created digit that some nanker just creates from thin air.

BitchesBetterR… Thu, 12/07/2017 - 03:23 Permalink

The fact that lots of suckers are willing to pay $5 bucks at starbucks for a shit latte is beyond inflation or currency value - it is simply (((((stupid)))))There a small cafe joint near by my home where I get my fucking cappuccino prepared to perfection at $3.25 - there is always a fucking long line to get coffee, but all worth it once you taste it.  

otschelnik Thu, 12/07/2017 - 03:30 Permalink

Ergo, 1) rand, lira, and egyptian pound are the most undervalued currencies, 2) there's a not many millenial hipsters there to provide demand for lattes, 3) purchasing power parity is a myth?  

Itinerant otschelnik Thu, 12/07/2017 - 08:00 Permalink

You nailed it.Such comparisons ignore the costs of hiring barristas, renting the joint, milk and other ingredients, the "novelty"/"chique" value in places where Starbucks is out of reach for the ordinary person (market power). The whole idea that you are comparing the costs of the "same thing" is bogus. Some of the ingredients are not locally procured, but shipped there (shipping costs). The whole exercise says exactly nothing about whether currencies are trading at their fundamental level (something also indicated by the wild swings in forex that can occur over the course of several years, making your vacation cheap one summer and expensive in a different summer).

In reply to by otschelnik

foxenburg Thu, 12/07/2017 - 05:44 Permalink

I rarely pay as much as €1,70 ($2) for a great cup of coffee in Madrid....very often €1,25 ($1,50)....same as for a beer or glass of wine. And I spend a lot of time in Lisbon...which is much cheaper again. Why a coffee should be expensive in a shithole like Johannesburg, escapes me. 

CRM114 Thu, 12/07/2017 - 06:27 Permalink

My local Starbucks shut down after only 18 months, a worker tells me it never made a profit.Is my currency under/overvalued, or are my neighbors over-intelligent? ;)

Ban KKiller Thu, 12/07/2017 - 08:22 Permalink

23 pesos for Americano in Ajijic, MX. Includes real cream on the side. About 1.10 US. Never ordered latte. Four tacos, two margaritas, eight bucks. 

oterno Thu, 12/07/2017 - 08:58 Permalink

Norway should be at the top of this list, above Switzerland.A tall Latte costs 55 NOK, which is 6,6 USD with todays exchange rate.Muh socialism!